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The Future Outlook on IT Offshore Outsourcing

September 6, 2010

IT offshore outsourcing, like other industry segments, also suffered the impact of the global financial crisis. Many IT service providers had to re negotiate their existing contracts and saw a freeze for contracting new services. However, unlike many sectors still feeling the pinch, the offshoring of outsourcing is on the rebound, as many organizations continue, and even deepen, their cost reduction initiatives as a means to maintain their competitiveness.

After the global financial meltdown and the intervention by governments to save the day, pressure intensified for job creation at home. Many believed that there would be a reverse trend in offshore outsourcing, as this was perceived as corrosive for the domestic job markets.

First it is necessary to separate the two: outsourcing and offshoring. Outsourcing is the basic movement to spin out activities or processes that were originally carried out internally by the organizations themselves but can still create jobs at home. It is the natural process of companies to enhance their performance by outsourcing part of an assembly process to a partner outside the organization’s borders. The partner may be just two doors down or it may be in another state.

Offshoring, on the other hand, is actually to outsource somewhere abroad. Many government authorities and industry specialists now favor curbing offshoring practices by American corporations to protect jobs at home. As much as it is important to have a thriving domestic job market, it is also important that organizations are able to compete and grow, while providing overall value along the entire chain. Offshoring is about being able to seek the best cost of production combined with the best–of-breed production skills, wherever they may be.

In 2000, in the midst of the e-business revolution, Grady Means and David Schneider, two change management executives from PricewaterhouseCoopers, wrote a book called “Meta-Capitalism.” They outlined the need for companies to reformulate (re-engineer themselves) in order to address the new challenges brought about because of internet and e-business.

Their “meta-capitalism” claim was based on the single unique view that, in the future, organizations would focus in the only two key areas that really mattered and the real core of their businesses: Brand equity and customer relationship. Those are the two key drivers companies need to center themselves around, as all the other activities carried out, were only to support those very two things.

According to the authors, globalization of the world economy and the capital markets has created an increasingly competitive landscape. Combined with the accelerating trends of standardization and simplification provided by the increasing computing power, has made businesses increasingly reliant upon technology to develop and maintain their competitive differentiation.

Means and Schneider noted that to remain competitive in the market, companies needed to focus more energy on core issues of the business and spin out activities and functions that were energy intensive. The solution was, and is, to outsource and offshore. Offshore outsourcing is the natural consequence of increasing competition, turbo charged by the deployment of technology and innovation.

In 2005, Thomas Friedman, author of “The World is Flat”, analyzed the overall impact of key technology “turning points” in the economies, the organizations and people. He clearly states the consequences of this new highly competitive world business scenario and the impact of easy access to higher education in highly populated geographies, combined with the standardization provided by increasing adoption of technology that support business processes, would offer much greater cost effective production and services outsourcing offshore platform.

Undoubtedly, the financial crisis during the past two years has forced many companies to reconsider their business strategies and look solely to cost reduction activities. For companies that were already engaged with outsourcing strategies, the result was a renegotiation of contracts, which has contributed to an overall worldwide decrease in

offshore outsourcing revenues. However, there was an increase in the quantity of new contracts closed of offshore outsourcing for these same cost cutting reasons. Medium size and smaller organizations are now adopting outsourcing strategies, as they find themselves forced to compete to survive.

In the latest forecast released by Gartner, revenues for IT outsourcing are trending upwards after a negative result in 2008-2009, with an overall 3,8 % growth in generated revenues and an expected growth above 4 % for 2010. According the Gartner’s latest forecast, the worldwide IT management services market was US$207.4 billion in 2009, which was a 3.0% decline from 2008. This markedly contrasts with the annual growth rates in 2007 and 2008 of 10.2% and 6.2%, respectively.

While 2009 saw negative growth, there was an overall upward trend in the past 5-6 years with 2010 already demonstrating recovery signs. Gartner’s forecast shows a return to growth in all regions of the world for the last quarter Furthermore, looking ahead to 2014, every region is expected to grow with Asia and Latin America witnessing the highest growth rates.

There are strong indicators that offshore outsourcing is on track again for strong growth as seen per the 2Q10 earnings reported by some of the top guns: – Accenture’s earnings showed that it met its overall revenue projections. Further, it reported signs of “positive momentum in the market as our clients are once again looking to the future”; CSC’s earnings was positive, with the impact of key large signings in its ITO business ; HP Services’ overall quarterly revenue was $8.7 billion, up 2% from the prior year; within services, the ITO business grew 6%.

So to say that IT Offshore Outsourcing is on the decline or will be dead due to new technological developments, such as the “cloud computing” paradigm, is inaccurate, at best. Many governments understand that Offshore Outsourcing is an irreversible trend and are actively be laser-focused on their core business to maintain their competitiveness. Therefore In this enormous “offshore outsourcing ocean” that increasingly circles around the globe, either you sink or sail.

Comments

Small and medium sized may still consider to continue in outsourcing their non-core business activities to outsourcing solution providers to strive for survival and to be competitive in the tough market for a lower cost.

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September 9th, 2010 9:34 am

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Thanks for the helpful post! Now the offshore outsourcing has become a new mantra of success for the developed as well as under developing companies. The present offshore outsourcingsituations seem to be a bit problematic as there is an immense economic slowdown all over the world. However it is not the end of the outsourcing work at all. It will bounce back for sure.

It is really an informative article with useful information to be shared and learnt. Outsourcing is gradually becoming the key factor of growth in every business, but the economic slowdown has slowed down the pace of its existence and growth.